Japanese Companies Beef Up IR Efforts


Several surveys reveal that Japanese companies are beefing up their investor relations (IR) efforts, but that the gap between what the companies are providing and what is needed by "buy side" and "sell side" investors is still noticeable.


Quarterly Disclosure


The Nikkeisurveyed 100 major Japanese companies, of which 25 already disclosed quarterly results. Of these 8 began disclosing quarterly results for the first time in 2002. Since these disclosures are still volunatary, and will be voluntary until 2004, there is noticeable divergence in the degree of disclosure in these reports, and as yet no standardization. IN some cases, the entire disclosure is only one sheet of paper. The Tokyo Stock Exchange will begin requiring summary quarterly disclosures from the April~June quarter of 2003, and proper income statement and balance sheet disclosures from April~June 2004.


Dissatisfied Investors.


Corporations themselves are beefing up their internal IR staffing. Over 79% of the companies surveyed say they now have IR staff. However, investors know that just because a company has IR staff does not mean there has been a major change in a companies's IR program. "In Japan, the IR department is not given financial data from the accounting or finance departments" claimes one analyst, which means that in some cases the IR department is little more than an PR department. In addition, response times to stock price reactions to news releases can take inordinately long times. Only 44% of the companies responding to the survey say that IR managers are an integral part of the management team. Moreover, even if IR activities are expanded, they are not being expanded in a fair and open fashion. Information meetings are almost entirely oriented to analysts, and very few top management actually show up in front of investors to describe their business strategies.

Domestic Investors Buying US Stocks


While US stocks were being sold off by individual investors in July of this year, Japanese investor buying of US stocks was picking up. For the week between July 29 and August 2 of this year, domestic investors bought JPY365 billion of foreign stocks, up by some 40% from the previous week, and the largest weekly amount since the weekly numbers began to be announced by the MOF in April 2001. A large driving force of this buying was Japanese pension fund buying of US stocks.


US stock buying opportunity.These pension funds make there stock allocations annually at the beginning of the year based on projected returns by asset class. The sharp decline in US stock prices has resulted in the weight of US stocks in domestic pension fund portfolios falling below benchmark levels, leading to net buying to top up exposure levels to benchmark weights. Consequently, the accounting scandals and concerns of a double dip in the economy, plus the weak dollar, are seen as a buying opportunity by at least one group of foreign investors, i.e., Japanese pension funds.

New Underfunded Pension Liabilities of JPY4.6 Trillion


According to the Government Pension Fund Association, returns on welfare pension funds in Japan were minus 4.16% in FY2001, following a decline of 9.83% in FY2002. The largest factor in this decline was falling prices of domestic stocks. In FY2001, domestic stock prices fell 16.22%, while domestic stocks accounted for an average of 32% of some 1,737 domestic welfare pension funds. Because required returns (returns assumed for actuarial purposes) for these pensions are between 3%~5%. What this means is that actual returns have undershot projected returns by some 8 percentage points, which for accounting purposes means that corporations must provision additional funds for the difference which represents underfunded pension liabilities.


More Extraordinary Losses Are Required.Thus despite the fact that corporations had already taken extraordinary losses for cumulative underfunding of their corproate pension plans, they will have to provision for an additional JPY4.6 trillion of underfunded liabilities on a total of some JPY58 trillion of welfare pension funds. Under the current rules, they can spread these losses over a 15-year period.


More and more companies however are funding the burden of supporting a defined-benefit program which consists of a) a government-required welfare pension plan, and b) additional pension benefits that differ according to each company. The company-sponsored portion of the pension plans has become so burdensome for some of Japan's companies that they are basically giving up on supporting the plans in-company, and tossing the welfare pension portion back into the government's lap, or simply shutting down their pension plans in record numbers.

The NASDAQ Japan Saga


Relations between top executives of the Osaka Stock Exchange (OSE) and NASDAQ had been deteriorating over the two years since the venture began. Goro Tatsumi, the president of OSE, reportedly described NASDAQ as "naive" in its dealings in Japan, while letters from NASDAQ executives to Mr. Tatsumi vented their frustrations at the slow pace of implementation and their disappointment with the OSE's failure to meet its contractual obligations. The original argreement stipulated that the technology employed would move the exchange away from an auction system to a dealer market, a move known as "Phase 2". But phase 2 needed approval of OSE's board members, who are smaller brokers runing small, IT-deficient brokerages. They failed to see the need for the new system and refused to pay for any of it, despite NASDAQ's agreement to put up $4.5 million. Trying to push the OSE into action, NASDAQ in June asked for a cut in its fees and said it would start to investigate a strategic partnership with other markets. JASDAQ spotted its opportunity and made a series of statements saying it was open to the idea of a tie-up with NASDAQ Japan, but NASDAQ would have to terminate its agreement with the OSE first.


This infuriated Mr. Tatsumi, who had previously been passed over as JASDAQ's vice-chairman two years previously. NASDAQ was alarmed when the OSE chairman was asked to testify in Parliment about trades conducted through a company called Kosei Securities that legislators claimed inflated volumes on the OSE's options market. NASDAQ was also hoping to have 200 companies listed by now, instead there were only 98. This was compared to claims they would have 2,000 by 2005.

Take your losses and go home.NASDAQ Japan subsequently took a $20 million write-off on their Japan operations, in which they had a 43% interest while Softbank had a 43% interest. Softbank has said it would not pull out of NASDAQ Japan, but with NASDAQ packing up and going home, their interest in NASDAQ Japan is not worth much, with only 98 companies listed and trading on the market being inconsequential. The most obvious recourse would be to try and sell what's left (without the trading platform NASDAQ was trying to establish) to JASDAQ, if they are still interested. (from the Financial Times, August 15).

Japanese Companies Slowly Move to Implement Defined-Contribution Pension Plans


Japanese comapanies are finding that the new US 401K-style employee pension plans that went into effect last April are a hard sell to their employees. Risk-adverse Japanese employees are leery of being required to assume the risk involved in investing their money. Moreover, "401K-like" is a major misnomer for Japan's new defined benefit plans, because the MOF refused to allow the tax benefits for the Japanese plan that US 401K plans enjoy. Moreover, because few companies have adopted the new Japanese defined-benefit plans, these plans are not yet portable, as they ostensibly should be.


The early adopters are adopting cash balance plans operated by the companies which adds a fixed, accumulated sum at the end of every year to reflect interest income linked to market interest rates. The company can take advantage of any lowering of interest rates to reduce the reserves required to set aside for future fixed benefits. Employees benefit because it offers them more control of their pension than under the defined benefit system, while a certain level of benefits remains guaranteed. But with current ultra-low interest rates, the interest rate "kicker" offered at the end of the year is modest indeed.


Boon to the consulting businesses of the Trust Banks and Life Insurers.Companies such as Sumitomo Trust & Banking, Daiwa Trust & Banking and Nippon Life Insurance have now set up consulting services to offer advice on how to overhaul their pension systems.

Japanese Firms Wait Clarification of US Sarbanes-Oxley Act


Of some 1,026 Japanese companies surveyed by the Japanese Ministry of Economy and Trade, 56% want to stick with their current Japan GAAP (generally accepted accounting principles). Fewer than 6% say they will adopt the new US standards. But for Japanese companies with market capitalization over JPY101 billion, about 29% favored US GAAP, versus 37% who would keep Japan GAAP. While Japan's business lobby, the Japan Business Federation, has yet to seek exemptions from the legislation, the association of Japan certified accountants has come out against applying the new law to Japanese corporations.


The new stricter corporate responsibility law imposes a maximum fine of $5 million and a 20-year prison term for CEOs and CFOs who knowingly make false statements on their SEC reports. While the SEC rules have so far been limited to 942 US companies, the new law ostensibly applies equally to foreign "private issuers".


Increased accounting visibility welcomed by investors. The overall impact of the Sarbanes-Oxley Act on Japanese accounting will be to increase accounting visibiity, even if Japanese companies resist full adoption of the more stringent measures of the new law; a move that will be welcomed by both overseas and domestic investors.

Japanese Companies Will Be Dragged Kicking and Screaming to Adopt Impairment Accounting


Impairment accounting is where companies are required to report the depreciation in the market value of not only fixed assets such as property and factories, but also lease rights and goodwill from corporate buyouts. In Japan, implementation of impairment accounting is expected to have the most negative impact on the book values of construction, real estate and retail/distribution firms. Under impairment accounting, assesors estimate the future cash flows for fixed assets over a specified period, such as 20 years. If these values are less than current book values, the asset becomes subject to impairment accounting. Either the present value of future cash flows plus liquidation value, or the current market value of the assets (whichever is higher) is subtracted from the book value of the asset, and this become a reported loss. Impairment accounting is already incorporated in international accounting standards and in US GAAP, whereas Japan has delayed introduction until March 2006. Japanese companies do have the option of introducing the new accounting rules from March 2004, which is around the same time they will be required to report quarterly results. For those companies currently sitting on significant amounts of unrealized losses on their fixed assets, the switch to impairment accounting will mean large deficits and in some cases net negative equity.


No Longer Any Justification to Hold Onto Non-Performing Assets. Impairment accounting also means that it will no longer make any economic sense whatsoever to hold on to non-performing assets that have unrealized valuation losses. The effort to get thse off the books will in turn exert downward pressure on market prices, of property, used factories, and unproductive retail space. Valuation of Japanese property is already slowly moving toward discounted cash flow analysis, but impairment accounting will further establish this methodology of valuing property.

Over 80% of Japan's Savers Are Not Interested in Stocks


A survey by Japan's Cabinet Office (Public Survey Regarding Securities Investment) has revealed that 82.7% of Japan individuals have no interest in investing in Japanese stocks, and they are cautious about investment trusts, government bonds and corporate bonds as well. Moreover, 79.7% had no experience in investing in marketable securities. The least surprising aspect of the survey was that only 12% thought that securities brokers were trustworthy.


Music to Banker's Ears. This is music to the ears of Japan's bankers and the postal savings system. It means that, no matter how flakey bank balance sheets are, and how ridiculously low interest rates are given, domestic savers would still rather keep their money in a bank than invest it in "risky" assets. That is why Japan's core population of stock traders has remained at around 7 million for the last decade or so, and probably won't be changing much in the future--except to decline as the older "semi-pro" traders retire.


Japan's banks hold some JPY506 trillion of deposits for the nation's savers, as well as large and small companies. Deposit insurance caps of JPY10 million have already been placed on time desposits, which are some JPY238.5 trillion of the total, and the Japanese government is moving to place caps on regular deposits as well, which account for JPY201.2 trillion of the total. Under pressure from companies, the government will guarantee deposits that are essentially for bill payment and salary payments. But demand deposits at nationwide banks are currently some JPY24.9 trillion.

ASEAN Exports to China Top Exports to Japan


Exports from the ASEAN region to China are growing rapidly, and in the April-June quarter exceeded ASEAN exports to Japan, meaning that even Japan's importance in the Asian region is waning. April-May exports from Singapore, Thailand, the Philippines, Indonesia and Malaysia grew 14% to US$6,477 million, while exports to Japan were down 16% YoY to US$6,165 million, reflecting declining operating ratios at Japanese factories when mean lower raw materials consumption, and reflecting decreased demand from Japan's exporters who are seeing falling demand for office equipment, etc. The main driver of ASEAN exports to China is electronic parts, as Japan and US/European factories have moved to Asia and demand from assembly operations for consumer electronic products and PC products is soaring. Between April and May, Chinese demand for such products soared nearly 60% YoY. In addition, China is unable to supply all of its domestic need for oil and petrochemical products, paper/pulp and other basic materials, which they are now dependent for supply of on Asia, not Japan.


China will become the second-largest trading partner for ASEAN.ASEAN and China are aiming for a free trade zone in the next 10 years, so trade between the two economic blocks can only increase. Thus for ASEAN, China is becoming the second largest trade block aside from the US. The obvious implication is that the ASEAN nations will be placing priority on China over Japan.

Tokyo Stock Exchange Eases Listing Rules


The TSE will be easing some of its listing rules from October of this year, primarily to allow firms reporting temporary deficits to list on the first and second sections of the exchange, provided they have market capitalization of over JPY100 billion and sales over over JPY10 billion in the latest reporting year. Presently, candidate firms needed to have over JPY400 million in reported profits as a requirement for listing.


More stringent checks?The move is aimed at recognizing those cases where restructuring and other non-recurring expenses have caused temporary deficits, but the stocks in question still enjoy strong support from investors. The TSE does however promise to make tougher checks on the profit improvement plans of such firms to prevent firms with chronic deficits from abusing the system. During the TMT bubble in Japan, the excitement and competition among established markets such as the TSE and JASDAQ caused by NASDAQs entry led to a rushed creation of the TSE "Mothers" market. The rush to create new market avenues for venture companies led to embarrasing abuses, such as the case of Liquid Audio, Japan, where senior executives of the firm had connections with organized crime. Moreover, over the past couple of years, there have been more listed companies reporting deficits than companies reporting profits, as corporate Japan continues to destroy record amounts of investor capital. Thus the TSE would be better advised to conduct a general crack-down on chronic deficit companies already listed and monitor their plans to regain profitability.

US vs Japan Accounting Standards


While Japanese accounting standards are approaching international accounting standards, there are still important differences between the way revenue is recognized in Japan and in US FASB accounting standards. In FASB-based income statements, there is no line item for "ordinary profit" and there are hardly any line items for special losses. Ordinary profit in Japan is defined as operating profits plus non-operating income (including interest income), minus non-operating (including interest) expenses. Restructuring costs that can be recorded as non-recurring under Japanese accounts become reflected as operating expenses under US accounting standards. In addition, there are large differences in the accounting of lease assets. In finance leases, only the interest and commissions part of the lease fees is recorded as sales, while under Japan standards the entire lease fee is recorded as sales. In the case of Orix, a major Japanese leasing company, reported sales under JGAAP (Japanese generally accepted accounting principles) was 2.2 times as large as reported sales under US GAAP.


The Worldcom and Enron accounting scandals in the US have had a large negative impact on the credibility of US accounting standards, heretofore considered the most credible in the world. As these scandals surfaced in the US, Japanese firms reporting under US GAAP–such as Orix, major trading companies and other Japanese firms with more complicated revenue structures–saw their stock prices get hit as well. In other words, increased visibility of the accounts acted as a discount factor for stock prices. As the US takes a hard look at its accounting practices and moves to make them more stringent, this will undoubtedly have an impact on Japanese accounting standards. Indeed, the new Sarbanes-Oxely Act of 2002 (the new US corporate accountability law) makes no distinction between domestic or foreign firms in its requirements.


Foreign firms lobby to be exempted from the more stringent provisions. Foreign firms listed in the US are lobbying in the US heavily to be exempted from the more stringent provisions of the act, which would have CEOs and CFOs accept criminal liability for the validity of the accounts, and impose tougher rules on audit firms and company audit committees. Japan's CPA Association is among these, but their case is being undermined by major Japanese firms who have already stated they will comply with the new, tougher US rules.

for more Japan news, see; Asian Business Watch

Golf Club Bankruptcies in Japan Continue to Soar


There are some 2,430 golf courses in Japan, and by most accounts, that's about 730 too many. Yet there are about 20 new courses being built a year, despite soaring bankruptcies among these golf courses. So far in this year, 67 courses have gone bankrupt, leaving irrecoverable debts of over JPY1 trillion. The pace of bankruptcies this year is already higher than last year, and about 3.5 times 1998 levels. At one time, every salary man just had to have a golf club membership, and golf course developers structured new memberships in such a way that the earlier buyers were virtually assured an attractive capital gain on their membership investment. Now, as course after course is going bankrupt, the golf course members are finding that their membership deposits, which were supposedly guaranteed, are being dramatically reduced or in some cases becoming worthless.


These member desposits are the biggest debt obligation for the golf courses. So foreign "vulture" investors like Goldman Sachs and Lone Star Group are buying up these gold courses, then having them declare bankruptcy under easier civil bankruptcy laws, which removes the liability to repay member deposits. Even after bankruptcy, these courses continue to operate, lowering green fees and other prices which puts further pressure on other golf courses to go bankrupt.


Members fight back.Course members are fighting back by organizing the members and forming an interim company that assumes ownership of the member deposits and real estate while another sponsor is located. They then become indirect shareholders in the operation and are then in the position to monitor the management company. This could put a crimp in the vulture funds' game of buying defunct gold courses, having them go to the civil courts to declare bankruptcy, and have all the previous members lose their membership deposits, all while the golf course itself continues to operate.

Koizumi Administration's Popularity Falls to 43%


According to an Asahi newspaper poll, popular support for the Koizumi administration has slipped again, to 43%, from 47% in July. By age group, however, the only group who a majority of which support the administration is the over 60 group. In addition, 42% do not support the current administration. In other words, its pretty even between those who support and those who do not, with about 20% of the population unsure which way to go. Most of the frustration with the Koizumi administration is the lack of progress in fixing the economy and improving employment, which continues to deteriorate.


Even 40% support is good for a Japanese PM.While the Koizumi administration's popularity has plunged from the 85% level in April 2001, his job does not appear to be in any immediate danger, because even 40% is relatively high for a Japanse prime minister. Historically, the situation has gotten serious when popularity ratings fall to the 20% level. However, as Junichiro Koizumi's shield of popularity now has some substantial cracks in it, he no longer can afford to ignore the opposition within his own party, which means his reform policies will continue to be watered down by compromise, as we are seeing all to frequently in recent days. In other words, he is becoming just another ineffective prime minister, unable to deliver on original reform promises.

Japan's Regional Banks Get Credit Downgrades

Moody's Investors Service Inc. on Friday gave Japan's regional banking sector a negative rating outlook.
Of the 30 regional banks rated by Moody's, six are under review for possible downgrade, while the rating outlook for nine others is negative, according to the major U.S. credit-rating agency. Credit ratings for the banks in question range from Aa3 to a low of Ba1 (junk bond status). The franchise value of Japan's regional banks is being seriously eroded because of the "hard economic realities" affecting Japan's regional economies. Money has been shifting from from smaller, weaker entities to stronger, larger regional and city banks, which has forced the government's to back off of a plan to place guarantee caps on regular bank deposit guarantees. Blanket guarantees on time savings deposits were already lifted last April. see Japan Times article

FAQ: How Safe is My Money in a Japanese Bank?

Q. Do Bank Debentures and Special Money Trusts Have Deposit Guarantees?


A. Not necessarily so. Even if the total value of the Special Money Trust is under JPY10 million, some products are guaranteed and some are not. The easiest way to tell the difference is by comparing interest yields on the two products. The product not guaranteed will have a slightly higher interest yield.

Q. Can I withdraw my money the day the bank fails?


A. If a bank fails, your money will be frozen for at least a few days, and maybe even several weeks, even if the deposits are guaranteed.

Q. Will my company-sponsored saving program be guaranteed?


A. In-company savings programs vary. If your company sets up a savings account in your name, it will be combined with your individual savings account. But if it is a joint employee savings account set up in the company's name, it is considered along with the company's other bank accounts, and since corporate accounts often exceed JPY10 million, there's a good chance your savings in that account won't be guaranteed.

Q. Is it possible to net out borrowings and time savings?


A. Only if it is specified in the original conditions of the time savings account. If it is included, it can be netted out even if your loan payment is in arrears (as long as you pay the late payment penalties).
However, in the case of a housing loan, only the amount borrowed from that particular bank can be netted out.

Q. If the bank fails, all I get back is JPY10 million?


A. That's not necessarily true. It depends on how much cash the bank has left after covering its net negative equity. In addition, in the case of a larger city bank or regional bank, it is likely that the central or regional government will act to support the bank to save local jobs, meaning the bank would get support in the form of taxpayer money.

Q. If I break up the savings over JPY10 million among other family members, can I ensure they will get the JPY10 million savings guarantee?


A. It is possible that, if it is obvious the accounts were broken down into smaller lots and are still effectively controlled by one person, they could well be considered as one account.

Q. Then is it safer to invest in gold or condominium apartments?


A. While it is difficult to keep one's money in a bank that has questionable financial viability, bank deposits by nature are principle-guaranteed, whereas investment in gold and particularly condominium apartments is not. Thus investment in either of these involves the risk of loss of capital, as does investment in stocks.

for more Japan news, see; Asian Business Watch